HEG, Topline in line, margin beats estimate…. :: ICICI Securities, link

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Topline in line, margin beats estimate….
• In Q2FY15, capacity utilisation stood at ~70% (our estimate: 70%) as
compared to 70% in Q1FY15 and ~58% in Q2FY14
• Operating revenues came in at | 323.4 crore, down 6.9% QoQ but up
7.1% YoY (our estimate: | 329.3 crore)
• EBITDA came in at | 49.6 crore, down 16.2% QoQ but up 8.4% YoY.
It was higher than our estimate of | 45.1 crore. The EBITDA margin
came in at 15.3% vis-à-vis our estimate of 13.7%
• PAT also came in down 70.5% QoQ at | 5.6 crore and was also lower
than our estimate of | 11.7 crore. PAT was lower than our estimate
on account of loss on exceptional items to the tune of | 8.5 crore.
Better placed to cater to volatile steel demand
The electric arc furnace (EAF) route of steel manufacturing is a preferred
option for producing steel in the current volatile demand scenario. Unlike
the blast furnace-basic oxygen furnace (BF-BOF) process, the EAF
process can be started and stopped at will (operationally flexible) and also
generates less carbon emissions. HEG’s product i.e. graphite electrodes
caters to this segment (EAF) of steel making and, hence, is better placed
in the subdued demand scenario. In CY12, steel produced through the
electric arc furnace (EAF) process constituted 29.2% of total crude steel
production. On an average, ~1.5-2 kg of graphite electrode is used per
tonne of steel manufacturing through the EAF route.
Demand pressure exists
Global apparent steel consumption growth has been subdued with mere
3.6% growth YoY (1481 MT in CY13 vis-à-vis 1429.5 MT in CY12). The
World Steel Association estimates steel consumption growth will
moderate to 2.1% in CY14. With a subdued global demand scenario and
HEG’s reliance on exports (exports ~75% of its production), the company
is witnessing demand pressure with subdued utilisation in FY14 (73% in
FY14 vis-à-vis 78% in FY13).
Closure of capacity globally to provide support to prices
Recently, on the back of subdued profitability, globally some graphite
electrode manufacturers announced closure of their inefficient facilities
(capacity ~120,000 tonne), which should support prices of electrode,
going forward. On the raw material front, needle coke prices are expected
to mirror electrode prices, thereby having a limited impact on the
company. The company is also a key beneficiary of currency depreciation
and benefits from the same as its product realisations are all in foreign
currency. The benefits are, however, negated to some extent (~35%) as it
imports its key raw material (needle coke).
Maintained capacity utilisation estimates, recommend HOLD!!
Going forward we have maintained our capacity utilisation levels estimate
of 72% for FY15E and 78% for FY16E. We have valued the stock on an
SOTP basis valuing the core business at a 20% discount (reduced from
25% earlier on account of improvement seen in general environment) to
its global peer’s CY15E and CY16E average EV/EBITDA of 8.5x (resultant
FY16E EV/EBITDA of 6.4x) and assigned a 20% discount to HEG’s stake in
BEL. Subsequently, we have arrived at a target price of | 290 and
maintained our HOLD rating on the sock.

LINK
http://content.icicidirect.com/mailimages/IDirect_HEGLtd_Q2FY15.pdf